LF extends curve with historically tight 10 year Swissie

Länsförsäkringar Hypotek launched a Sfr125m (Eu101m) 10 year covered bond on Thursday of last week (14 March), which allowed the Swedish issuer to extend its curve to 10 years and was priced through the curve of domestic Swiss covered bond issuers, according to an official at the bank.

Martin Rydin, head of funding, LF Bank

The deal was priced flat to Swiss franc mid-swaps and through the curves of Pfandbriefbank schweizerischer Hypothekarinstitute and Pfandbriefzentrale der schweizerischen Kantonalbanken, Switzerland’s domestic issuers, according to Martin Rydin, vice executive president at Länsförsäkringar (LF) Hypotek.

“There had been limited supply of Nordic covered bonds in the Swiss market and we knew that investor demand was high,” said Rydin, “so we were confident we could achieve very tight levels.”

A comparable issue in the Swedish market could probably have been priced even tighter, although the bulk of the domestic Swedish demand is in the five year tenor, said Rydin.

“Tapping the Swiss market gave LF the possibility of extending its Swiss franc curve to 10 years at a very tight level and at the same time getting investor diversification and a longer covered bond maturity profile,” he added.

LF is a regular issuer in the Swiss market. Its last issue was a Sfr175m seven year deal launched in May 2012, said Rydin.

The new 10 year deal was initially marketed at a Sfr100m size, but was increased to Sfr125m as a result of strong investor demand, he said.

Rydin added that the typically smaller size of issues placed on the Swiss market perfectly suits LF’s funding needs.

“Given the limited size of our funding needs we preferred to reach a tight level with a smaller transaction rather than paying more for a larger issue,” said Rydin.

The transaction was priced flat to Swiss franc mid-swaps, a level that no other non-domestic issuer has reached in the past five years, according to a syndicate banker at sole lead Credit Suisse.

“According to our data, the last negative launch spread achieved in covered bond format has been a NordLB 10 year issue launched at mid-swaps minus 3bp in December 2007,” he said.

“Pricing flat to mid-swaps was a great result and gave us the possibility to test if we could reach such a level, which constitutes almost a ‘psychological limit’.”

The 10 year issue attracted almost exclusively domestic investors, he added. Asset managers were allocated 38%, pension funds 25%, insurance companies 12%, internal (lead) bank treasury 15%, and external bank treasuries 10%.